Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, discusses the government intrusion into the financial sector by changing payday loans. Followed by CFPB’s rules regarding payday loans and Appleseed Network and Grassroots Group respond to CFPB’s rules.
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Payday Loans
More Government Intrusion into Financial Sector – New Rules Keep Coming
No Plan to Help Borrowers
After years of arguing about the subject I have finally realized that the United States does not want a capitalist system. It prefers a heavily regulated financial system that is controlled by a small number of technocrats in government agencies that are immune to Congressional influence. As a result:
- A government agency sets the price of short-term funds and influences the price of long-term funds
- The same government agency determines the quantity of money that should be available to the economy
- A series of agencies control every aspect of the banking system or the allocation of funds to the economy
- Government agencies have taken control over dividend payments to bank shareholders
- Virtually none of these agencies are responsible to Congress
The politicians, the media, and the American people strongly support these actions. Therefore, the government is now reaching out to the non-bank financial sector to bring it under greater control. There are old and new rules in place or being put in place to gain this control. It would take hundreds of pages to define what is being done so a small number of sectors, which are increasingly regulated, are being indicated here:
- Old/New Rules
- Credit cards
- Mortgages
- Bank overdraft fees
- New Rules to be, or have just been, announced
- Payday loans
- Auto warranty lending
- More overdraft rules
- Investment advice (this from the Labor Department)
- Online advertising of financial products deemed immoral, but not illegal, by the government
- More capital requirements for banking
Being contemplated according to the Federal Reserve is much greater control over the asset management industry. The Fed has invented the term “macro-prudential” to explain its coming attack. It is using the old/new term “systemic financial risk” to justify its right to regulate the sector more aggressively.
At this point, people like myself can only watch and be mystified as to what is happening. One can only wonder whether and when there will be a reaction. It is definitely not positive for bank stocks and now not for other financial issues. GE clearly knew what it was doing when it shed its financial subsidiary.
One wonders also where low income households now go to obtain mortgages and short-term funding. The underground economy comes to mind.
Historic Opportunity To End Predatory Payday Lending
The Consumer Financial Protection Bureau (CFPB) has come out with a proposal for the first federal regulation of small-dollar consumer loans. This rulemaking could help millions of people and be a breakthrough in the struggle to end the abuses of triple-digit-interest, debt-trap lenders. To realize that potential, however, the CFPB will have to address what appear to be a number of weaknesses in this iteration.
The proposal is built around the crucial principle of requiring lenders to establish every borrower’s ability to repay. Predatory payday and car-title lenders typically do the opposite: they target people who, precisely because they lack the ability to repay the loan itself, are likely to get trapped in debt for months or years at a stretch, paying fees and interest that often end up dwarfing the amount they originally borrowed.
The Consumer Bureau has also wisely recognized the need to craft a rule covering a broad range of small-dollar loans, and not just payday and car-title loans in their most common forms. A narrower proposal would invite abusive lenders to do what they have done in many states that have taken that approach: find ways to tweak their products without giving up the fundamentally predatory business model of extracting wealth from economically vulnerable people through products designed to make their financial troubles worse, not better.
Payday lenders have been working hard to make the rule weaker than the preliminary outline released last year, however, and the proposal we see today appears to include several provisions that, unless corrected, will allow lenders to evade borrower protections and continue their abusive practices.
We will be working with our allies in communities around the country to call on the CFPB to continue its work, close the gaps, and write a final rule to achieve the vitally important goal that it has brought within reach: stopping the debt trap.
Appleseed Network Reacts to Today’s CFPB Payday Lending Rules
A nationwide network of nonprofits today praised a historic proposal by the Consumer Finance Protection Bureau (CFPB) to provide safeguards for users of payday loans, calling for careful review to ensure that the new draft rule properly protects millions of Americans from predatory lending.
“The CFPB must ensure that payday loans are not a debt trap dressed up as a lifeline,” said Bert Brandenburg, president of Appleseed, a national network of public interest justice centers working to help low-income people build better lives. “Without protections that are strong and clear, too many payday loans fuel poverty instead of relieving it.”
The CFPB defines payday loans as short-term loans, usually for $500 or less, that are typically due on a borrower’s next payday. The finance charge may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an APR (APR) of almost 400%. By comparison, APRs on credit cards usually range from about 12 percent to 30 percent. Payday lending is banned in 15 states.
Appleseed is a network of 17 centers across the U.S. and Mexico, deeply rooted in their communities, that advances justice and opportunity to help low-income people build better lives. Appleseed centers in Alabama, Hawaii, Nebraska, South Carolina and Texas have worked to shine a light on payday lending debt traps in their states, enact reforms to protect consumers, and ensure that the court system treats everyone fairly instead of becoming an assembly line in service of the debt collectors.
- In Alabama, in 2003 the payday lending industry persuaded the legislature to legalize annual percentage rates (APR) of up to 456% rates for a 14-day loan, and up to 621% on a 10-day loan, and a study by the Center for Responsible Lending estimates that state residents pay $125,216,000 annually in payday lending fees—6th in the nation. Alabama Appleseed has led lobbying efforts to protect vulnerable consumers, helped pass 20 bans and zoning ordinances to curtail payday lending in 20 municipalities, and served as the State Banking Department’s expert witness in a lawsuit over regulations establishing a statewide database. Alabama Appleseed also coordinates the Alliance for Responsible Lending, a statewide coalition of advocates and stakeholders, and organized a community stakeholders’ roundtable during the CFPB’s first field hearing in Birmingham. Last March the White House asked Alabama Appleseed to convene payday lending advocates to meet with President Obama during his visit to Alabama.
- In Hawai’i, where payday lenders charge some of the nation’s highest rates (about 460% APR), Hawai’i Appleseed is fighting to cap the rate at 36%. The Center for Responsible Lending estimates that state residents pay $3,281,179 annually in payday lending fees.
- In Nebraska, the situation is similar—payday lenders charge about 461% APR—and Nebraska Appleseed is fighting for legislation to cap the rate, give borrowers enough time to pay their debts back—and clearer information about loan terms and their own rights. The Center for Responsible Lending estimates that state residents pay $30,819,287 annually in payday lending fees.
- South Carolina Appleseed has been working to change payday practice in the state since 1999, when it passed legislation to restrict licensing and prohibit prosecution for borrowers whose checks had insufficient funds. The Center focused national attention local payday lenders in a 2009 episode of NOW on PBS, has published materials to educate consumers on payday loans and helped pass legislation that allows only one loan at a time per borrower (and sets up a database to enforce the requirement), as well as enacting strict industry reporting requirements that have cut the number of loans made each year by 75%, cut fees paid by consumers by almost $100 million a year. Despite these achievements, the Center for Responsible Lending estimates that state residents still pay $57,773,701 annually in payday lending fees—12th in the nation.
- In Texas, which has less regulation of payday loans than virtually any other states, loans often carry rates of 500% percent APR or higher, and has some of the highest fees in the nation, according to the Center for Responsible Lending study. A separate Texas Appleseed publication released today documents a pattern of increasing fees for payday and auto title loans in the state. Payday lending fees reached $1.24 billion in 2015. Texas Appleseed, in partnership with a broad coalition of nonprofit and faith-based organizations, has helped 35 Texas cities adopt affordability standards for payday and auto title loans, and helped to expand a homegrown low-cost alternative loan program, the Community Loan Center, to give consumers low-cost alternatives to payday loans. Their research shined a spotlight on payday lenders who were illegally threatening consumers with criminal prosecution, and showed that payday lenders frequently cluster around facilities where veterans live. Texas Appleseed also works with the Texas Fair Lending Alliance to reform the Texas payday and auto title loan market.
Appleseed Centers in Alabama, South Carolina and Texas have worked with numerous local jurisdictions to pass zoning ordinances to limit the spread of payday and title lenders in multiple communities in their states.
In 2012, the national office of Appleseed published a best practices checklist to help trial court judges streamline their handling of consumer debt cases while ensuring basic fairness to debtors. Courts following the checklist would ensure that the defendant’s identity and address are properly verified, that the debt collection complaint is valid, and that the creditor is the actual owner of the debt.
A 2013 report from The Pew Charitable Trusts found that payday borrowers can only afford to devote five percent of their income towards loan payments and still cover basic expenses. But payday loans equal one-third of a typical borrower’s income.
The CFPB’s proposed rule, which will be open for comment for 90 days, comes on the heels of an announcement by Google last month that it would ban ads for payday loans.
Grassroots Group Responds to CFPB Payday Lending Rule, Pledges to Continue Fight to Protect Families from Predatory Lenders
National People’s Action joins hundreds of advocates arriving in Kansas City today to comment on proposed rules for payday, car title and payday installment lending. More events held nationwide calling for strong rules.
Kansas City, MO – Today, as the Consumer Finance Protection Bureau releases their long-awaited proposed rule on payday lending, opening the period for public comment, members of National People’s Action (NPA) across the country are taking action and speaking up.
NPA, which has been working to reform the predatory lending industry for years, is pleased that the process is moving forward, but is disappointed with the initial proposal. NPA and the families we work with, pledge to continue fighting to make sure the protections are as strong as possible.
“We’ve been working towards this day for years,” said George Goehl, executive director of National People’s Action. “For decades, predatory payday lenders have gotten away with taking money from people who didn’t have much to begin with. With interest rates north of 300 percent, and a business model based on trapping people in debt, they’ve been allowed to strip wealth from families and communities.
“The CFPB must live up to its mission of protecting consumers from deceptive and abusive financial practices by writing a rule that will put a stop to the abuses that are endemic in the small dollar lending industry,” said Goehl.
“These products aren’t safe,” said Ken Whittaker, a Detroit resident and member of National People’s Action affiliate, Michigan United. “I took out two loans for $700 which spiraled into a cycle of debt that ended up costing my family more than $7,000. These predatory lenders harassed my family and reached into my bank account to take most of my paycheck so I could barely survive. They even garnished my tax returns.”
National People’s Action is calling for a strong and broad payday, car title and payday installment lending rule. It must meet three basic criteria to protect American families:
- First, the rule should require income and expense underwriting practices on all loans to ensure American consumers can affordably pay back the loan.
- Second, the rule should put a stop to the constant loan rollovers and refinances that are rife in the industry and are hallmarks of the debt trap.
- Finally, the rule should prevent lenders from taking money directly from a borrower’s bank account or holding unlimited title to their car.
“We’re clear about what the CFPB needs to do to fulfill their mission of protecting consumers. They need to write a rule that shuts down the debt trap,” said Liz Ryan Murray, policy director for National People’s Action. “Time after time, we’ve seen this industry worm their way through loopholes much smaller than these. That’s why we need a rule that’s stronger than this proposal. Millions of people across the country are depending on the CFPB to get this right and we’re going to make sure the Bureau hears from them.”
National People’s Action and its partners across the country plan to generate tens of thousands of comments to the Consumer Financial Protection Bureau from borrowers, faith and community leaders, and people of conscience calling on the CFPB to ensure the final rule contains these commonsense safeguards.
Members of the organization are traveling to Kansas City today to offer testimony at the CFPB’s field hearing. They’ll be joining members of PICO National Network and other members of the Stop the Debt Trap Coalition at a public rally at 12:30 p.m. in Barney Allis Plaza. They will demand strong rules – a demand that will be echoed by events in dozens of other states including Illinois, Idaho, Michigan, Wisconsin, Nevada and Tennessee.
Later in the afternoon, members of National People’s Action who are in Kansas City will be visiting a payday storefront, calling on lenders to stop deceiving families about the CFPB’s proposed rules.
“Payday lenders thrive on lies and deception,” said Cherie Mortice a community leader from Des Moines, Iowa and a member of National People’s Action affiliate Citizens for Community Improvement. “They’ve spent thousands of dollars trying to win over elected officials and deceive customers about this common sense new rule from the CFPB. We want to make sure the industry doesn’t interfere with the public comment period, when our communities are supposed to get their say.”
For more information, or to interview George Goehl, Ken Whittaker, Liz Ryan Murray, or Cherie Mortice, please contact Kathy Mulady at [email protected] or 206-992-8787.
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National People’s Action is a network of 29 grassroots organizations in 18 states working together to advance a racial and economic justice agenda for a new economy and true democracy.
